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A Digital, Automatic Alternative to VAT?

Value added tax was intended to
be a final tax on consumers, yet the compliance and cash flow costs on business
grow ever more steep in the 150-plus countries around the world that implement
a value added tax system.

Time for a radical rethink? Legal
academics Charlène Adline Herbain and Marie Lamensch propose a technologically-driven
alternative -- An electronic payment system that would track payments
throughout the distribution chain, but would levy consumption tax only on
business-to-consumer (B2C) transactions.

At the time VAT was introduced –
initially, in 1948, in France – it was probably the best method of levying
a tax on consumption while avoiding fraud and economic distortion, because it
gave every participant in the distribution chain an incentive to document and
collect.

However, the rise of a global
economy has multiplied opportunities for tax fraud – which the government has
combated with anti-evasion measures that become increasingly
burdensome for honest taxpayers. Compliance is particularly
onerous in the growing sector of internet sales.

Herbain and Lamensch suggest that
while traditionally, one-off retail sales taxes were less enforceable than VAT,
today, automated systems enable any point in the distribution chain, including
retail sales, to be monitored to meet the revenue needs of the government while
slashing administrative costs for all parties.

The automated system Herbain and
Lamensch propose has the following features:

VAT is suspended
up until the retail stage.

VAT is charged and
collected on all EU B2C sales.

All sales are
recorded via a real-time data processing system. For business-to-business
(“B2B”) sales, tax is waived provided the taxable status of the customer as a
business is established by means of an electronic certificate. For B2C sales,
the status and location of the customer must be ascertained for a correct
calculation of the tax.

Automated audit
software establishes an electronic trail for each transaction, replacing the
current paper trail.

Where payment is
made by a private (non-certificated) customer, the data processing system
functions to ascertain the customer’s place of residence (generally
available to financial institutions under anti-money laundering
legislation), determine the applicable rate, and deliver the instruction to
charge VAT.

VAT charged to
customers is automatically directed to the Treasury without ever touching the
bank account of the supplier, so as to enhance enforcement. The mechanism is
broadly similar for both conventional and internet sales.

Their proposal contains a number
of features to accommodate, for example, B2B cash payments, or circumstances in
which the supply is to be consumed onsite, rather than at the place where the
customer is established.

Herbain and Lamensch also
contemplate broader proposals for harmonizing and simplifying VAT across
Europe, including a uniform EU-wide rate to be introduced in conjunction with replacing
the current destination principle with a tax at the point of origin.
Origin-based taxation would avoid the necessity of multiple registrations,
administratively complex one stop shop schemes, and the challenges of
identifying the location of the consumer, but is not feasible in a system where
differences in VAT rates promote jurisdiction shopping.

In sum, modern technology and a
global economy make the current VAT system increasingly cumbersome, open to
fraud, and administratively expensive – but they also open the possibility for
new approaches that would better serve the needs of tax authorities and
taxpayers alike.

Charlène Adline Herbain teaches
at the University of Luxembourg and at the Faculty of Law of Lorraine
University and works as a post-doctoral researcher at the Catholic University
of Louvain in Belgium. Marie Lamensch teaches and is a Senior Researcher at the
VUB Institute for European Studies and at the Catholic University of
Louvain. Their article, Reforming
the VAT System for the 21st Century, is published in the August, 2015 issue of BBNA’s Tax Planning International Indirect Taxes Journal.

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